How Much Do You Pay Your Executive Director?

It’s ironic that despite the fact that the majority of executive directors working in nonprofit organizations are paid up to 40% less than their counterparts in for-profit businesses, the media has their focus on the few high salaries paid in nonprofits. In some states, there are laws that instruct boards to review the salaries of their executives, while other states have considered making laws that would restrict the pay in nonprofit organizations to specific amounts. This brings us to the question of how much do you pay your executive director?

Nonprofits are more conscious than ever about executive pay because of both the internet and the new regulations being made in some states. All the Forms 990 for nonprofits in the US (with an annual revenue of $25,000 and above) are posted at “www.guidestar.com” on the internet, each showing the salaries of “key employees” who earn $50,000 or more every year. Simply speaking, anybody can find the salary of top staff in almost any nonprofit organization just by visiting this website.

However, the media is also packed with stories about executives with compensations – in both nonprofit and for-profit corporations. A large number of CEOs at large corporations earn over $10 million a year which is often 400 times what a blue collar worker at the same company would earn, according to Business Week, Stanford Report, which raises the eyebrows of shareholders and employees. The salaries of some nonprofit executives – where organizations with a budget of between $1 million and $2.5 million have a median of $75,000 – while still legal, also raise eyebrows within some circles. In the state of California, nonprofit organizations earning a non-governmental income of above $2 million are required to have the salaries of the CEO/executive director and the CFO reviewed and approved by the board.

Despite what the press says about excessive compensation, the boards of nonprofits are still worried that they are not paying their executives enough. A national study showed that most executive directors of nonprofits are quite satisfied with their salaries, even though these salaries are often somewhere between $40,000 and $60,000, even in some of the most urban residential areas in the country. On a scale of 1 to 5, 5 being “very satisfied”, respondents showed an average satisfaction rating of 3.47, although a considerable portion (27%) chose 1 or 2. Note also, that 6% of executive directors are volunteers and receive no salary at all.

What was even more disturbing was difference in salary between the genders. In spite of women’s predominance in executive positions all around the country, their male counterparts earn significantly more than they do. Out of the six sizes of organizations studied, this holds true of five. This gap is exceptionally wide at organizations with budgets over $5 million. The average salary for female executives of nonprofit organizations with budgets that fit between $5 and $10 million nationwide was $82,314. The average salary for men, at this same range, was $98,739.

The question of how much to pay your executive director usually comes up in one of these two situations:

When talking about giving your current ED a raise and when hiring a new one.

Boards usually choose a salary designed to draw in stronger candidates. As time passes, this same board might stop using salary as a tool to retain, and only focus on increases in percentage. Some factors and objectives to take into consideration are:

The salary of the executive director should be able to make your organization competitive for talent in the market. Where is your ED most likely to leave to? Where will you most likely recruit your next executive director from? If your answer is similar to nonprofit, then look at nonprofits in your area and find out what they pay, keeping in mind that the salaries at nonprofits very similar to each other can vary a great deal, even up to factors of 10 or more. If government is your answer, focus on the types of positions your executive director would take and figure out what benefits and commissions are offered for these positions.

In comparison to the other employees, the pay is fair. How much do the other employees make? How close or distant do you feel is appropriate?The salary of the executive director for the year ahead is a reflection of the expectation we have of him/her in the year to come and is not a reward for accomplishments he/she made in the past. However, the ED’s performance in the previous year can give us clues as to how well he/she would do in the next year.

How much you pay your executive director should send a message to the ED himself/herself, to your staff, and to others. It is important to speak words of encouragement, but money is important as well. Praising an ED while you keep his/her compensation flat will end up sending a message that your board values her work. Also, if you give an inadequate executive a pay raise while thinking about firing them, you are sending mixed signals which may cause you to get trapped in a wrongful termination lawsuit.

The salary of your workers – including the executive director – should not put any financial stress on the organization. It is the responsibility of the board to keep cost (including the ED’s salary) at an affordable level.

However, when you are hiring a new ED, you should probably invest your “venture capital” so that you can offer a higher salary. Neighborhood Investment Corporation did an experiment which showed that grants of $5,000 and $10,000 were made to local groups for them to raise the salary that was offered to their new executive. The theory was; if you offer a larger salary, it would attract and hire a better qualified person whom would raise enough money in the organization to cover the costs and also raise the salaries of other workers. Sometimes, boards would succeed in hiring a better qualified person, thus proving the model correct. But other times, boards were still unable to draw in the talent for which they were looking.

Whatever you decide to pay your executive director, you should continue to have his/her salary reviewed every year by your board, preferably based on the evaluation of his/her performance and your budget for the year to come. The simple (but important) task of assigning someone to research on the salaries of other organizations similar to yours can help set a useful reference for your board.